In 2013, Ireland was starting to see the light at the end of the tunnel. Just. The country had narrowly avoided a car crash during the euro crisis; GDP was growing at 0.2 percent on an annual basis; yet Dublin was still receiving emergency payments under its EU/IMF bailout, with the country rated sub-investment grade by Moody's.
It was in this context that DirectRoute, the consortium chosen to finance and build the €550 million N17/N18 Gort to Tuam project in west Ireland, was striving to achieve financial close on the largest scheme to come out of the country's latest wave of availability-based road PPPs. In the end it prevailed: along with its industrial sponsors – Strabag, Sisk, Lagan and Roadbridge – and largest equity providers – the Marguerite Fund and InfraRed Capital Partners – mandated lead arranger Société Générale managed to secure €144 million from the European Investment Bank and additional funding from a clutch of commercial banks, reaching a close in April 2014.
But success came at a price. “The original financial close came at the back end of a particularly bad time for Ireland in terms of its financial position. As a result, the margins we initially closed the deal on were really high,” says Declan Carney, general manager of DirectRoute.
Fast-forward two years and you get a radically different picture. Having rebounded by a mighty 4.8 percent in 2014 – the fastest growth rate in Europe – the Irish economy was first estimated to have jumped 7.8 percent in 2015 (further statistical wizardry then placed GDP growth at 26 percent by taking foreign investment into account). The country had slashed public debt, secured A ratings from all the agencies, and issued its first 30-year bond, raising €4 billion through an issue three times oversubscribed with a yield of just under 2.1 percent.
That created the right conditions for a May 2016 refinancing, even if the N17/N18 project was still halfway through construction. “Normally you would refinance once construction is complete, because this is when you lock in the improvement in risk profile that comes with a project that is operational. But in this case a strong market opportunity existed for an early refinancing. It may be that the market opportunity still exists at the point of construction completion, but, equally, it may be that the markets have changed,” says Charles Greenfield, head of infrastructure finance at Société Générale.
It helped that DirectRoute had made good progress on construction, with experts assessing that the consortium was 20 percent ahead of its initial budget. Construction was expected to be about 50 percent completed by the time the refinancing was going to be closed. Much of the critical work had already been done, meaning the project was already significantly de-risked.
Other factors were pressuring sponsors to complete the refinancing as early as possible, Greenfield says. “Another factor was that the makewhole – or prepayment penalty – due on certain of the existing tranches of debt was calculated on the outstanding amounts. So if we had held off until completion, the makewhole payments would have been far more significant, and was mounting up month by month.”
With that in mind, DirectRoute and Société Générale set about renegotiating financing terms with existing lenders. The initial expectation was that most of them were supportive of the transaction and ready to top up.
“As part of this refinancing there was always going to be a need for raising additional debt, if only to pay for breakage and other costs of the refinancing. And there was scope to raise some more debt from within the existing lender group,” Greenfield recalls. But then the project's sponsors hit a bump. The EIB was not opposed to the transaction, but the proposals it came up with were simply not “commercially advantageous”, says Carney.
“We would have really liked to keep the EIB in the transaction,” adds Greenfield. “They did support the initial transaction and the market then was short of liquidity for long-term Irish risk. It would have been difficult to get this original deal away without the support of the EIB. What's more, the EIB had provided a fixed-rate facility and breaking EIB fixed-rate funding is expensive.”
Still, he acknowledges that the EIB faced internal barriers that prevented it from offering the most “efficient” financing terms, making it worthwhile for the consortium to repay the multilateral early.
This prompted the consortium's decision to mandate Société Générale to arrange a new debt raise via a privately placed bond. Fortunately, the bank had recent experience in doing this. In November 2015, it had run a competitive auction to finance the M11 Gorey to Enniscorthy PPP in south-east Ireland (which won our European transport 2015 debt award), with Aviva Investors, Babson Capital and NN Investment Partners, eventually buying up €113 million worth of senior secured notes. It did it again in January this year when the same institutions allowed the €230 million N25 New Ross Bypass PPP to reach financial close.
So this time the process was swifter. “The group of investors we had identified for the purpose of those two transactions had been through a competitive process to win those roles. So the view was that, if we were to run this type of competition again, we probably wouldn't improve much on the very recent result we'd achieved on the previous two deals – and from these funding competitions, we knew which institutions had appetite for this transaction. We were also looking to close the refinancing quickly, so it made sense to approach mainly those investors and seek to replicate in large part what was done on the M11 and N25,” Greenfield says.
From then on, the project sponsors and the lead arranger pressed the turbo button. It helped that the contribution of private institutions tailed off easily with existing arrangements. “The original deal was a heavily negotiated transaction, and did include some fixed-rate and some floating rate funding,” Greenfield says. “So the previous intercreditor mechanics already catered for both these instruments, as well as the vagaries of makewhole payments under a variety of scenarios.
“New lenders were engaged on the basis that the existing deal was not up for negotiation to ensure a rapid documentation process. What we did negotiate was the commercial terms for the fixed rate notes, but that instrument was slotted into the existing commons terms agreement and intercreditor agreement.”
In theory, Transport Infrastructure Ireland and the country's National Development Finance Agency, which were procuring the project, would have needed convincing. “There's always a bit of work to be done around quantifying precisely the amount of the refinancing gain, how it should be shared, and whether the Authority should take it upfront as a lump sum or as a reduction to their annual availability payment. The total amount of senior debt in the deal was also increased and the Authority needed to be comfortable with this aspect of the refinancing as well.”
That did not prove to be much of a problem. While pricing on the original transaction ranged from 350-450bps, the Irish state achieved savings of €23 million following the refinancing thanks to margins being reduced by more than 50 percent. All documentation was agreed in less than six weeks; Irish elections and delays in forming a governing coalition did not affect the process.
The transaction's success bodes well for the future, Carney says. “It provides an incentive to look at other PPPs with the same mindset. Authorities can now encourage other concession companies to release some of the mileage they have in those projects as well.”